Post-Application Reorganization Leads to Rejection of Rate Request

Deeming no longer valid the test-year data that an electric utility had filed in conjunction with its petition for rate relief, the Oklahoma Corporation Commission has dismissed the utility's proffered base rate plan in its entirety. The commission explained that because the utility, Empire District Electric Company (EDE), had been acquired by another energy entity subsequent to the submission of its rate application, and because EDE had claimed that savings in operation would be a key benefit of the merger, it would be improvident for the commission to pass judgment on new rate schedules on the basis of expense and income statements that pertained to the old EDE as opposed to the "new company." 

The utility had given notice of its intent to file a general rate case in early November of 2016, following up with a formal application filed December 21. The rate proposal, which indicated a revenue deficiency of almost $3.025 million, was premised on a test year ending June 30, 2016. Although a merger agreement had been contemplated as far back as late 2015, the transaction did not receive the last regulatory approval required until late December of 2016, with the merger not fully consummated until January of this year. Thus, the commission said, the tendered test-year information would not coincide with the operational reality of the utility during the prospective rate-effective period. 

The commission described the acquisition plan as fairly complicated inasmuch as it involved a series of transfers, with EDE being acquired by Liberty Sub Corporation and Liberty Utilities (Central) Company. Under the merger agreement, Liberty Central was to purchase all of EDE's issued and outstanding shares of stock, after which EDE would be merged with Liberty Sub, a wholly owned subsidiary of Liberty Central and an entity created specifically for the purpose of facilitating the acquisition. 

Upon consummation of the merger, however, Liberty Sub would cease to exist, leaving EDE as a wholly owned subsidiary of Liberty Central, although EDE was designated as the nominal survivor. To add to the complexity of the merger, Liberty Central is itself an indirect subsidiary of a Canadianheadquartered energy conglomerate, Algonquin Power & Utilities Corporation. In essence, then, ultimate ownership of EDE was transferred to a foreign entity. 

In seeking commission authorization for the merger, EDE had attested that by becoming part of a large corporate family, which operates under a "shared services" model, the utility would be able to take advantage of economies of scale. That is, the company said, it was very likely that certain administrative expenses would be lower on a combined basis than they would have been on a standalone basis. 

In addition, the utility pointed out that there would be cost savings just by virtue of it no longer incurring any stock issuance or associated reporting expenses. The company also had drawn attention to the fact that there would now be at least another 12,000 ratepayers coming under the EDE umbrella, such that its total costs would be spread out over a broader customer base. 

However, the commission said, none of those purported cost savings were reflected in the test-year data upon which EDE had grounded its rate request. The commission remarked that the test-year concept for rate making is designed to give a regulatory body information on the rate applicant's known and measurable expenses versus its earnings, reliance on which would enable the agency to come up with as accurate a prediction as possible of the utility's revenues and expenses in the upcoming rate period. 

But the commission determined that it would be next to impossible to engage in any such forecast with a reasonable degree of precision in the instant case. The commission therefore told the utility that it would not rule on new rates for the company at the present time. Instead, it invited EDE to submit a new rate application once it has at least one full year of operating statistics on a post-merger basis. 

Despite its refusal to address new base rates for the company, the commission did assent to institution of a new rate rider. The commission stated that the surcharge, denoted an environmental compliance rider, was necessary to allow EDE to recover undisputed costs related to federally required upgrades at certain of the company's generating facilities. The commission reported that the charge will pertain to (1) state-of-the-art emission control measures installed at the utility's Asbury Power Plant, and (2) investments in a combinedcycle natural gas-fired generating unit at the Riverton 12 facility, which took the place of two retired coalfueled units. 

In supporting the rider mechanism, the commission noted that the utility had been under orders from the U.S. Environmental Protection Agency to reduce hazardous emissions from the two plants and that no party had questioned the prudence of the costs claimed by EDE thereto. Re Empire District Electric Co., Cause No. PUD 201600468, Order No. 667123, Aug. 17, 2017 (Okla.C.C.).